Company Notes Digest 8.13.18

Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

We only read a handful of calls this week but there were three pretty important takeaways worth highlighting:

1) Industrial confidence is leading to high capacity utilization and higher inventories. High capacity is a precursor to higher inflation. Meanwhile higher inventories create the pre-conditions for recession if inventories need to be liquidated.

2) Redfin warned about a “significant change” in the housing market. Buyers are not able to absorb even low inventories at these high prices. The housing market is very sensitive to interest rates and is usually a leading economic indicator. It may be a sign that we’re inching closer to recession.

3) The New York Times mentioned that it’s expanding its digital ad purchases beyond just the “big two” (Google and Facebook). If digital marketers are ready to branch out to other sites, it means that growth could slow for Google and Facebook and could accelerate for the second tier of the internet (e.g. Twitter, Snapchat).

The Macro Outlook:

The pace of business is not slowing down

“overall, I feel very good about the momentum, the pace of business is not slowing down, our growth and opportunities are out there, and we’re seeing our customers continue to spend…I’ve been around this stuff for a long time. So this is my best feel at this, okay? It’s a different cycle. I think we’re in early stage of the cycle.” –Emerson CEO Dave Farr

Industrial output is hitting old peaks

“Many of [our] businesses right now in North America are actually getting back to peak performance in last cycle in its actual sales. So, what that means is we’re having to get our plants geared up, we’re having to get the people geared up.” –Emerson CEO Dave Farr

Customers are comfortable taking on inventory risk

“a lot of our customers are starting to level load more production…versus where they used to try to cycle. We’re starting to see more and more customers to try to keep things level, which smooths us out more. So, we’re not seasonal. It’s a different view than we – we’re starting to see some different habits from our customers now.” –Emerson CEO Dave Farr

It’s becoming time to add new capacity

“[We] keep having the debate back and forth what’s the right balance of adding new people, adding new capacity.” –Emerson CEO Dave Farr

But something has changed in the housing market

“We are seeing a significant change…It is definitely changing. We’re hearing things from our real estate agents that we haven’t heard in 3 years about homebuyers stepping back from high prices” –Redfin CEO Glenn Kelman

Redfin agents are reporting that homes are getting harder to sell

“reports are now coming in from Washington D.C., Boston, Virginia and parts of Chicago as well, that homes there are getting harder to sell…for the first time in years, we are getting reports from managers of some market that homebuyer demand is waning…real estate agents saying, I put a home on that normally would have sold in a week, and it’s still on the market a month later. I expected to get eight competing offers, I got one and it was below the asking price” –Redfin CEO Glenn Kelman

Buyers have had enough of high prices

“What’s striking about this change is that it seems to have been driven by dissident demand from homebuyers, not just a low supply of homes for sale…As U.S. home prices have increased faster than wages for 70 straight months, buyers in markets like these have finally had enough, at least for now.” –Redfin CEO Glenn Kelman

Sales growth will likely slow if not reverse in August or September

“Year-over-year U.S. home sales declined in June. We expect U.S. home sales growth to have improved slightly in July, then to weaken again in August and September…we think that there is probably going to be a slowdown in U.S. sales growth, if not a reversal in August or September.” –Redfin CEO Glenn Kelman

…Just in time for midterm elections

“to state the obvious, there is intense interest already in this year’s midterms.” –New York Times CEO Mark Thompson

Consumer:

Disney will own 60% of Hulu after the Fox deal closes

“Obviously, after the deal closes for 21st Century Fox, we’ll own 60% of Hulu. So that will fit in very significantly to our app strategy.” –Disney CEO Bob Iger

35% of marriages in the US are the result of dating apps

“in this country 35% of marriages are the result of dating apps and people don’t mind paying 20, 30, 40 bucks a month for the hope of finding someone that they can fall in love to marry.” –Match Group CEO Mandy Ginsberg

Technology:

Digital marketers are expanding beyond just Google and Facebook

“we’re getting more aggressive at testing channels beyond the big two, Google and Facebook. So you saw us start marketing more aggressively in the second quarter on other social platforms. You’re seeing us experiment more aggressively with different kinds of display.” –New York Times COO Meredith Levien

Technology helps offset wage inflation

“we have to offset the pressures we have on the employee side…by using always the optimal technology within our organization to drive productivity.” –Jones Lang LaSalle CEO Christian Ulbrich

Miscellaneous Nuggets of Wisdom:

You have to mix brand advertising with direct response

“Many technical folks really have a crush on direct marketing, because Facebook and Google put a pixel on somebody’s browser, they show up on Redfin site. You can directly attribute that sale. And people like that kind of assurance.But for an emotional purchase like this, when your brand awareness is in the low-single-digits, you really need to invest in making sure that people understand who you are.” –Redfin CEO Glenn Kelman